By Sandra Fleishman
Washington Post Staff Writer
Sunday, October 1, 2006
If you have been looking for a mortgage, you know that your credit score is key to opening that next front door.
The higher your score, the less you pay to buy big-ticket items such as houses or cars on credit. For example, on a $300,000 30-year, fixed-rate mortgage, borrowers with scores of 760 to 850, the highest range possible, pay $470 less a month than those with a score in the 580 to 619 range.
Much lower than that, many lenders say, and you will pay a huge premium if you can get credit at all from traditional sources.
Other lenders say the magic numbers are 600 and 720 -- anything below 600 is too risky while anything above 720 gets the best of the best interest rates.
Fair Isaac Corp., the company that came up with the mathematical system behind the most widely used score, FICO, doesn't label the ranges.
But lending experts say they get their signals from Fannie Mae and Freddie Mac, who buy mortgage loans on the secondary market. For years, their guidance to lenders was to be cautious with borrowers who score below 620. Now there is no absolute number in their guidance because Fannie and Freddie have automated underwriting programs that predict risk in other ways.
For borrowers in the low 600s, however, the secondary mortgage buyers tell lenders to look at other parts of the loan application for offsetting factors, such as a big down payment.
The FICO score is drawn from data collected by the three national credit bureaus. But FICO isn't the only number that matters in getting a mortgage loan. The three credit bureaus -- Experian, TransUnion and Equifax -- also produce separate scores based on information they get from creditors, which can vary from bureau to bureau.
Here are some more basics:
· Score s : Credit scores come from information kept by reporting agencies on how well you pay the bills that are reported to them, how much credit you have and how long you have had that credit. Mathematical models are used to turn the data into a number.
Paying bills on time is critical: It counts for 35 percent of a FICO score.
The "amounts owed" on credit cards count for another 30 percent of the FICO score. The lower the debt as a percentage of the credit limit, the better, said Fair Isaac spokesman Craig Watts. Experts recommend that consumers keep the balance on cards at no more than 35 percent of their credit line.
The other pieces of the score are length of credit history, new credit and types of credit used.
· Reports: The credit report is a separate document, compiled by credit bureaus based on information from your creditors. It shows all loans or credit accounts in your name, the limit on the cards and payment history. It also includes a record of everyone who has made an inquiry on your file within a certain period of time.
Federal law entitles everyone to a free report every 12 months from each of the major credit bureaus. Check it to make sure the information is correct.
To get a free report from any or all of the bureaus, go to http://www.annualcreditreport.com , a Web site run by the three firms. Or call 877-322-8228 and follow the prompts. Some people want to see all three reports before looking for a mortgage.
Maryland residents can get a second free report from each bureau per year, from the same Web site.
You can also get a free credit report and score from one or all of the three bureaus if you sign up to try services that monitor your reports. But after a certain period of free use, often only 30 days, those services carry a monthly fee.
The bureaus also sell reports. Fair Isaac's Web site, http://www.MyFICO.com , sells the three FICO scores and credit reports for about $48.
· Concerns: Critics have said for years that some credit card companies don't report credit limits, thus unfairly reducing scores. A South Carolina consumer has filed class-action lawsuits against the three bureaus, charging that they unfairly allow this practice. But no federal law requires lenders to report data to any bureau. They only must strive to be accurate.
Fair Isaac offers general tips on improving scores, such as paying off debt rather than moving it around, and not opening new credit card accounts that you don't need.
Opening and closing credit accounts can have unexpected results, though, depending on where the accounts are and how many are closed or opened simultaneously. For more information, see Fannie Mae's consumer booklet "Taking the Mystery Out of Your Mortgage Loan" at http://www.fanniemae.com , MyFICO.com's Credit Education section and the consumer information at Annualcreditreport.com.
· What if you have no credit history? Length of credit history counts for 15 percent of the FICO score, a big problem for the estimated 50 million people with little or no credit.
But a national credit bureau called PRBC says it is trying to change that.
Founder and chairman Michael Nathans said the goal is to help borrowers build credit files and credit history through payments they have made for rent, utilities and any other bill that's not reported to the major bureaus, including payday loans and remittances to family in other countries.
Though lenders are required under the Equal Credit Opportunity Act to consider these kinds of accounts, consumers often don't know that they can submit that information to supplement their FICO score, Nathans said.
PRBC, which started in 2002 in Annapolis as Pay Rent, Build Credit Inc., "operates as a credit bureau" under federal fair credit laws, Nathans said. A consumer with six months or more of what is called "nontraditional" credit can create a file using the PRBC Web site, http://www.prbc.com . "That file is something that a lender can use if a consumer gives them permission," he said.
PRBC does not charge consumers to set up a file or to view their own file. There is no fee for creditors to add information, and banks can electronically report customer payments at no charge.
The only fee, said Nathans, is if a borrower wants verification of previously paid bills. To verify rent payments costs $20, but borrowers need a minimum of six months of payment, Nathans said. To verify other "trade lines," such as payments for electric bills or cable bills, costs $15 each.
Borrowers seeking loans through Fannie, Freddie or the Federal Housing Administration need to show that they have paid their rent and three such trade lines for at least 12 months, Nathans said. That verification costs $65.
Nathans said CitiMortgage, Fannie Mae, Freddie Mac and the Ford Foundation have been early supporters. The National Association of Mortgage Brokers this spring agreed to educate its members about the service.
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